S&P downgrades Builders FirstSource

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Standard & Poor's Ratings Services has lowered its rating on the unsecured notes of Building FirstSource to 'CC' from 'CCC-' and revised its recovery rating to '6' from '5' to reflect diminished recovery prospects, given a higher level of first-lien obligations, the credit rating company announced. The '6' recovery rating indicates an expectation for a negligible (0% to 10%) recovery in the event of a payment default.

At the same time, S&P affirmed its corporate credit rating for the Dallas-based LBM chain, stating that the pro dealer has adequate liquidity after having bolstered cash balances with proceeds from a new first-lien term loan.

"Our vulnerable business risk opinion acknowledges that the company's revenues are down nearly 70% from their cyclical peak. Recent sales improved modestly off of deep lows, but we do not anticipate a more-robust recovery until 2013 at the earliest," said Standard & Poor's credit analyst James Fielding. "Our highly leveraged financial risk assessment reflects a heavy debt burden that was exacerbated by a new secured term loan. However, the cash proceeds from the new loan provided the company much needed financial flexibility, such that we now view its liquidity profile to be adequate despite our expectation for operating cash flow deficits over the next 12 months."

Builders FirstSource appears to be on track to generate $730 million to $740 million of revenue in fiscal 2011, up modestly from $700 million in 2010, according to S&P estimates. The company has significantly downsized its production capacity and overhead structure but is still likely to generate about $20 million of negative adjusted EBITDA for the year, the analyst note said. This will mark an improvement over a $37 million adjusted EBITDA deficit in fiscal 2010, however.

S&P’s baseline scenario for 2012 assumes that U.S. housing starts improve by about 17% and that Builders FirstSource's revenues improve 20% as the company gains market share because several of its competitors have downsized or exited the business entirely. The negative rating outlook reflects the firm’s opinion that “extremely difficult operating conditions” won’t meaningfully abate for the LBM company until 2013 at the earliest.

Although it expects a larger jump in U.S. housing starts in 2013 – 29% -- the ratings agency still questioned whether Builders FirstSource’s EBITA would be able to fully cover an estimated $37 million of annual interest expense.